This article originally appeared in National Review Online
Tyler Cowen points us to a fascinating new paper by João Paulo Pessoa and John Van Reenen, both of the Centre for Economic Performance at LSE, on decoupling in the US and the UK. First, the authors differentiate between “net decoupling”
the difference in growth of GDP per hour deflated by the GDP deflator and average compensation deflated by the same index
and “gross decoupling”
the difference in growth of GDP per hour deflated by the GDP deflator and median wages deflated by a measure of consumer price inflation (CPI).
It turns out that while there has been very little net decoupling, there has been considerable gross decoupling, particularly in the US:
This difference between gross and net decoupling can be accounted for essentially by three factors (i) wage inequality (which means the average wage is growing faster than the median wage), (ii) the wedge between compensation (which includes employer‐provided benefits like pensions and health insurance) and wages which do not and (iii) differences in the GDP deflator and the consumer price deflator (i.e. producer wages and consumption wages). These three factors explain basically ALL of the gross decoupling leaving only a small amount of “net decoupling”. The first two factors are important in both countries, whereas the difference in price deflators is only important in the US.
It is fairly well established that (i) is a significant phenomenon and that (ii) plays a role for middle-income and high-income workers, and it is interesting to see the role of (iii) and how it varies across countries.